EXAMINING THE ENVIRONMENTAL IMPACT OF EUROPEAN UNION EMISSIONS
TRADING SCHEME (EU-ETS) - AN INPUT OUTPUT APPROACH.
LAWAN Usman Ali, Student - CEPMLP, University of Dundee, Phone: +2348050928956, email: usco_ali@yahoo.com
Overview
The consequences of environmental challenges resulting from climate change manifestation are not a new subject of debate among
scholars, NGOs and Intergovernmental Institutions. Climate change occurrences are enhanced by increasing concentration of
greenhouse gases (GHGs) in the atmosphere, with carbon dioxide (CO 2) emission being the main contributor. Policy makers
around the globe have device various market based instruments such as carbon taxation and carbon emissions trading to
successively control GHGs emissions. In line with the above, the European Union (EU) launched the world’s first cap-and-trade
program for carbon emissions in 2005 - the European Union’s Emissions Trading Scheme (EU ETS). However, serious concerns
have been raised about the scheme’s ability to reduce emissions in a cost-effective manner due to the inherent uncertainties
associated to Emissions Trading. Moreover, this mechanism might not necessarily guarantee emissions reduction unless its value
reflects positive socioeconomic and environmental impacts.
This paper analyses the environmental impact of the EU ETS. Using the environmentally extended input–output (EEIO)
techniques, it evaluates the impacts of the scheme on EU energy use and CO2 emissions. The paper employ a disaggregate
measurement of the EU energy related CO2 emissions in 22 economic sectors and 6 (six) fossil fuel use to estimate the price effects
and environmental impact of EU ETS in the EU-15 Member countries.
This paper is structured into five parts. Part 2 examines Kyoto target and its implementation in EU-15, with an emphasis on the
mechanisms and operations of the EU ETS. Part 3 explain the environmentally extended input-output (EEIO) model and the data
preparation. Part 4 yields the results of the exercise and offers result interpretation. Part 5 presents the conclusion.
Methodology
This study employs the input-output methodology to evaluate the economy-wide environmental impact and price effect of an
emissions trading scheme in the EU. The work utilizes the environmentally extended input-output model to calculate the CO2
emissions intensity for each industrial sector (i.e. the total carbon content of their product), which allows for a computation of the
price effect after emission trading. Following the information provided by Eurostat’s ESA 95 input-output tables, the study analyse
twenty two (22) producing sectors and six (6) types of fossil fuels (Lignite, Peat, Lignite Coke, Natural Gas, Liquid Fuels and
Diesel Oil) in the EU-15 Member countries.
Results
The energy related CO2 intensity shows that energy intensive sectors such as Electricity, Metal Ore, Transport and other mineral
product are those with the highest CO2 intensities.
The observed change in demand resulting from emissions prices maintained the pattern followed by the CO 2 intensities with the
energy intensive sectors (i.e Metal Ore, Electricity, Basic Metals and Transport) suffering the highest price effects both in
percentage and absolute terms.
The environmental impact (in percentage) of carbon emissions trading in the EU resulting from a change in final demand illustrate
that an average emissions price of €22 per tCO 2 will lead to a 0.17%, 0.12%, 0.27% and 0.09% reduction in emissions from metal
ore, basic metals, electricity and transport sectors respectively.
Conclusions
The paper has provided input-output matrixes disaggregate estimation of EU-15 energy-related CO2 emissions and the effects of
EU ETS allowance prices levied in EU during 2005. These results were largely derived from the calculation of the 2005 EU energy
related CO2 intensities through an input–output demand model.
The empirical analyses of EU CO2 emissions and of the allowance price effects have reiterate the need for a comprehensive market
base strategy in EU climate change policies. The results also signify the need to improve the overall efficiency of the EU energy
system, and not only focus on the actual CO2 emitters. Moreover, the study has found the emissions trading mechanism to be a
viable and efficient instrument, both in environmental and economic terms.
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